Inflationomics

Labor Lessons?

Years ago, when my wife and I were just getting started with our publishing business, and before we knew anything about labor markets, we moved our business from Cedar Falls, Iowa, to a small town in Centre County, Pennsylvania, called Spring Mills.  It’s about 16 miles east of State College, where Penn State’s (PSU) main campus resides.  We moved there because my dad offered to give us a large building (an old hotel he had renovated and turned into an apartment building).  Wow…how generous! How could we pass up such an offer?  So, we moved.

At that point in our careers, we hadn’t acquired much capital and we were just happy to be moving to a warmer climate (one week every winter in Iowa had daily high temperatures of 20 degrees below zero Fahrenheit)…besides, how hard could it be to find good help there?  The question was never raised.  If Penn State can find people, why shouldn’t we be able to, also?  Little did we know.  In Cedar Falls, where we farmed out our printing work and had a couple college students working for us as secretaries, we were able to focus on writing and selling the publications we wrote.  We were able to develop our talents to their best use, while hiring help to do the typing, mailing, and answering phones, etc.

In contrast…in Spring Mills, we had to compete with PSU for labor. PSU paid double the market wages, employees didn’t have to work hard enough to earn a profit, and PSU paid excellent benefits.  Unless you were working for Penn State, or had a business that benefited from Penn State students/employees, you couldn’t afford to pay the prevailing wage rates.

We hired people who didn’t show up the first day for work, people who found a “better” job after 6 days or 6 weeks. We even hired a guy walking down the alley whose sole qualification was that he wasn’t currently employed! It became so bad that we eventually imported people from Grove City, PA (165 miles away) and had them live in an apartment at one end of the building and work at the other end.

One day we woke up and said “We’re doing this backwards!”…so we moved to Grove City.  (When the cost of labor becomes prohibitive, you have to move or you have to invest more capital to make everyone more productive. And today, you can substitute robots for people in some applications.)  Using the identical ad we had run in the paper in Spring Mills, we ran an ad for a secretary in the Grove City newspaper. Instead of having 2 inquiries, as we had had in Spring Mills, we had to stop setting up interviews at 25.  What a difference a good labor market can make!

In the United States, since WWII, we’ve had striking labor unions, minimum wages, high taxes, law suits, and onerous regulations, to mention a few things that have raised the cost of labor/doing business, but not increased its productivity.  Consequently, business has looked elsewhere for a more favorable labor market.  And it has found that market in numerous places, starting with war-torn Germany and Japan.  More recently Taiwan, Korea, China, Mexico, Thailand, and India, have seen the miracle of a free(r) market and have adopted a more capitalistic system (the only way to feed a billion people), albeit with many socialistic characteristics.  And the United States has adopted a more socialistic system with some capitalistic characteristics (and it’s getting harder to feed its people).

To stay competitive (earn a profit), my wife and I had to change our business and eliminate our employees.  Now we only use independent contractors and most of our time is spent managing rental properties and Amish helpers with our farming operation. By borrowing capital from banks to purchase and renovate those properties, we have become more productive with fewer people…and we have to work longer hours.

To stay competitive, U.S. businesses have had to do the same thing my wife and I did.  They either had to move to a more favorable labor market, or they had to invest more in education and capital in a place where capital is safe from law suits, civil forfeiture, taxes, environmental restrictions, and other regulations, to name a few things.

To attract the capital that moved away, the United States would have to change enough things to make it safe for capital to return.  Will that happen, or are we still setting up more red tape/taxes (Obamacare), fighting more wars (Afghanistan, Iraq, Syria, and maybe China soon), and taxing the rich (Hillary Clinton, who won the popular vote and Bernie Sanders an avowed Socialist, both wanted to soak the rich)?  We also need to cut back on government spending, which crowds out private enterprise…it’s tough to compete with someone who doesn’t have to watch their costs to stay in “business” (like PSU) and can just raise taxes or deficit spend whenever they need more money.

Bottom line: you move your business where the labor is the kind of labor you need (or you import it), not where the property is cheap.  And if you have shareholders, you’d better earn a profit.  Time will tell what the United States will do.

Robert F. Sennholz

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